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receives royalty payments depends upon the particular company.
For instance, New Vision pays royalties for six levels of down-
line distributors, and Herbalife pays royalties for three levels.
Petitioner receives substantially more income from royalty
payments than he does from his direct sales. In the year at
issue, petitioner reported a loss on the direct sales, due to the
costs of promoting his business. Promoting his business included
developing distributors who would break away and generate royalty
income for him.
For the year at issue, petitioner reported the receipts from
his direct sales, $23,464, on Form 1040 Schedule C, Profit or
Loss From Business, as gross receipts from sales, and claimed
$72,027 as business expenses. Petitioner reported the royalty
income he received, $190,485, on Form 1040 Schedule E,
Supplemental Income and Loss, and claimed $7,438 as commissions
expenses.
OPINION
Respondent determined that the income petitioner received
from the companies on the sales made by his down-line
distributors is income from petitioner's trade or business and is
subject to self-employment tax under section 1401. Petitioners
assert that the royalty income is not earned income nor income
from petitioner's trade or business and is therefore not subject
to self-employment tax. Respondent's determination is presumed
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Last modified: May 25, 2011